2019 Guide to Buying a Home with Student Loan Debt

Buying a home is supposed to a milestone in a person’s life. It is an opportunity to make an investment and own property. But for many, owning a home can seem daunting due to rising student loan debt.

Today, over 40 million Americans have student loans totaling more than $1.5 trillion, and this has had a significant impact on real estate. Students take out tens of thousands of dollars to pay for higher education, and this is estimated to cost the real estate market 83 billion dollars a year, according to a 2014 study. This means that 414,000 sales are lost every year to student loan debt as Millenials are buying houses at a significantly lower rate than generations before them.

Another study by the National Association of Realtors found that 83% of Millennials with student debt feel that their student loans are preventing them from being able to afford a home. The average borrower of student loans owes a little over $30,000, and one out of five borrowers owe more than $100,000.

If you have student loans, it doesn’t mean you can’t start thinking about owning a home. It may take some planning and hard work on your part, but home ownership is possible.

Can You Get a Mortgage with Student Loans

The biggest concern with trying to purchase a home when you have student loans is whether or not you will be able to take out a mortgage. If you are considering buying a home, you need to make sure that you have good credit and understand your debt-to-income ratio. These two things will impact how lenders view your application and your likelihood of being approved. The Federal Housing Administration (FHA) standards recommend that your debt not exceed 43% of your income. This includes your student loans, credit cards, auto loans and any other type of debt that you may have.

If you want to own a home, but have student loans you can do so with some careful planning.

Do Student Loans Affect Your Ability to be Approved for a Mortgage?

When you are considering buying a home, your student loans will affect whether or not you are approved for a mortgage.

While your student loans do not have as big of an impact on your credit score and how lenders view you as credit card debt, it does still matter. Your student loans and how much you pay every month towards those loans affects your debt-to-income ratio. If a significant amount of your income is going towards paying your student loans every month, lenders may view you as a risky investment.

How to Qualify for a Mortgage with Student Loans

If you want to qualify for a home loan while paying there are a few steps you should be taking to help ensure your success. If you are wanting to own a home, considering the following:

Look for a home you can afford

Having student loan debt doesn’t mean you can’t own a home, but it may mean that you will have to lower your price on the home you want. As you begin to look at homes, try to remain realistic about what you can afford. Not only will this help you become approved, but it will also help you live within your means and pay off your student debt quicker than if you were to purchase a pricey home.

Improve your credit score

When you start looking for a home you want to be sure that you have a good credit score. This will help prove to lenders that you are responsible and not a high-risk borrower. Depending on what type of mortgage you apply for helps to determine what kind of credit score you will need to be approved. For most conventional loans that are backed by Fannie Mae and Freddie Mac need a credit score at of at least 620. On the other hand, mortgages through the Federal Housing Administration only require a minimum credit score of 500.

Before you begin looking at homes, you should know your credit score and do what you can to improve it. Even if you meet the minimum credit score requirement, you should do your best to raise it so you can get a better interest rate. This will save you money throughout your loan as your payments will be cheaper and you will overall pay less money out of pocket.

Decrease your debt-to-income ratio

Before you purchase a home, you will want to decrease your debt-to-income ratio. This means that you will want to pay off as much debt as you can. Not only will this improve your credit score but lenders will also see it as a sign that you will pay back the money owed. Decreasing your debt-to-income ratio will also free up more money every month for you to make your house payment and pay back your student loans, which will most likely be your largest debt next to your new home.

Get pre-approved for a loan

Before you start looking for a home, you should try to get pre-approved for a loan. This will give you a better idea of the type of house you will be able to afford. If you have a loan amount that is already approved, you are less likely to convince yourself to raise your price and get into a house that will only leave you living paycheck to paycheck.

Look at down payment assistance programs

When you apply for a home, you will need a down payment. Contrary to popular belief, you don’t have to have 20% of the cost of the home to put down. Like the minimum credit score, the minimum down payment varies according to the type of mortgage you take out. For a mortgage backed by the Federal Housing Administration only needs 3.5%.

Down payments can be pricey, even at only 3.5%, but luckily there are plenty of down payment assistance programs out there ready and willing to help you out. This can make buying a home with student loans much easier. There are both national assistance programs and state-run programs that will help you buy your first home. Here are some national assistance programs that can help you with a down payment and/or purchase a home:

  • HUD’s FHA (Federal Housing Administration) Loan — This federal program provides home-buyers with a mortgage that is backed by the federal government and are extremely popular among first-time homebuyers. An FHA loan is especially useful for someone who has a low credit score, as the minimum score needed a 580. With this mortgage, you only need 3.5% down to purchase a home. If you have a lower credit score, as low as 500, then you can be accepted for a home loan with 10% down.
  • HUD’s Good Neighbor Next Door — This program from the Department of Housing and Urban Development (HUD), is open to people who are not first-time home buyers and is reserved for law enforcement officers, firefighters, emergency medical technicians, and teachers. With this program, you can save up to 50% on the list price of a home in an area marked out for revitalization.
  • National Homebuyers Fund (NHF) — This multi-state down payment assistance program can help you with a down payment by providing a grant of up to 5% of your loan amount. This grant never has to be repaid and offers a variety of affordable interest rates. As with the previous program, the NHF is not limited to first-time homebuyers.
  • Veterans Administration (VA) Loans — VA loans are available to help service members, veterans, and eligible surviving spouses of service members. While this is not a grant and has to be paid back, it does offer competitive mortgage rates, which can be useful for bypassing the need for a downpayment. If you are a disabled veteran, the VA does offer grants to help you purchase a home that is adapted for your disability.
  • USDA Single Family Housing Guaranteed Loan — Although this program from the U.S. Department of Agriculture (USDA) doesn’t help you with a down payment, it is worth mentioning. This assistance program helps low- and medium-income families own a home and is helpful if you don’t mind living in a rural area.
  • First Home Club — This down payment assistance program from Quontic Bank gives qualifying first-time home buyers a grant up to $7,500 to help with your down payment. The way this program works is a little different. You must first open a savings account with the bank, and for every dollar, you deposit into the savings account, the bank will give you 4$ towards your down payment, up to $7,500.

Shop around for lenders

Deciding which lender to go through when you take out your first mortgage can make a big difference in the amount you are approved for and the interest rate you can get. Instead of focusing on a lender that will give you the most money, focus on a lender that will give you the lowest interest rate. Before you begin to apply for a mortgage, shop around and research the different lenders out there. Get to know what kind of interest rates they offer and the types of loans they give out. Once you find a lender that you like, then you can submit your application. Shopping around for lenders first will help you save money and get the house you want. Be sure you know what your credit score is before you begin shopping around. This way you will have a general idea of what kind of rate may be available to you.

What do Lenders Look at When They Consider Your Application

If you have student loans, then there are many factors a lender will look at when considering your application for a home loan.

  • How big is your down payment — Having a large down payment will make getting a home loan easier and the amount of debt you owe to student loans matter less. Ideally, you would like to have a 20% down payment when you purchase a home.
  • Your income — When you apply for a loan your lender will look at how much money you make every year to be sure that you can afford the loan you are applying for. The higher your income, the more likely you will be approved for a home loan.
  • Length of current employment — How long you’ve worked for your current employer matters. Lenders like to know that you will have a steady income to pay back the loan. If you job hop, this could affect your ability to be approved for a loan. Most lenders like to see at least two years of employment history, and many like for that history to be within the same industry. If you’ve recently graduated from school and have yet to build a work history, you may find it difficult to be approved. Once you graduate, take a couple of years to build a work history and save for your down payment.
  • Credit score — Your credit score is important and will determine not only if you are approved for a home loan, but it could determine your interest rate. If you have less than desirable credit history that has left your credit score in shambles, you may want to consider working on your credit before applying for a loan.
  • Debt-to-income ratio — Most people have debt and having debt won’t discredit you from getting a home loan. However, the less debt that you owe, the more likely you will be approved for a home loan. Lenders like to look at how much debt you owe in comparison to how much money you make (debt-to-income ratio). In most cases, the highest accepted debt-to-income ratio is between 43–50%. You can figure out your debt-to-income ratio by adding up all your debt payments for the month and dividing it by your gross monthly income.
  • Assets — Many lenders want to know if you any assets that can be liquidated in the event you can’t make your regular payments. These assets can be in the form of a savings account, money market account, stocks or government bonds. These assets help to determine how risky of a borrower you are and can help you get a better interest rate. If you have high student loan debt, then having more assets can help you be approved for a loan or receive a better rate, which can lead to lower monthly payments.

How to Prepare for Buying a Home With Student Loans

As mentioned, having student loans won’t stop you from buying a house, but they can make affording a home more difficult. For many people, their student loan payments can rise as high as a mortgage payment. If you want to buy a home, your goal should be to make your monthly payments as affordable as you can. Once you have decided to buy a home, there are many steps you can take to prepare for the process.

  1. Improve your credit score — The first thing you should know is your credit score. You can pull your credit report once a year for from Annual Credit Report.com. You can also see a snapshot of your credit score and debts on Credit Karma, a website, and an app that allows you to view your credit score year-round for free by pulling your score from the two of the three major credit bureaus, TransUnion and Equifax. Once you know your credit score, you can work on improving it by paying off debt and not missing any debt payments. The higher your credit score, the more likely you will be approved for a home loan and the lower your interest rate will be. A lower interest rate can result in lower monthly payments. Here are simple ways you can improve your credit score:
    — Don’t close old accounts
    — Have a variety of credit (your student loans can help here!)
  2. Save for a down payment — To take out a home loan, you will need to save for a down payment. The higher the down payment, the better off you’ll be. Ideally, you want to have 20% down, but using a down payment assistance program, you can have a down payment as low as 3%. Just keep in mind that the lower your down payment, the higher the risk you will seem to your lender. Most buyers who take out a conventional loan with a down payment smaller than 20% will need Private Mortgage Insurance (PMI). This protects the lender if you are unable to make your payments.
  3. Decrease your debt-to-income ratio — When applying for a home loan, lenders will look at your debt-to-income ratio. This is how much debt you owe in comparison to how much money you make. If you have a lot of student debt, and you have high loan payments, your debt may be too high in comparison to your income. Before you buy a home, pay down debt as much as you can. Ideally, you want your debt to take up no more than 36% of your income, including your new mortgage. However, there are some lenders who accept up to 50%.
  4. Get pre-approved — When you get pre-approved for a home loan, this puts you in a better position to see beforehand what your costs will be, including your down payment. You will also be able to determine how much you qualify for, which can help you when looking for a new home. This way, you don’t end up looking for homes that are out of your price range, or you can’t get approved for.
  5. Look for an affordable home — As you look for a new home, be sure you are looking for one that you can afford. If this is your first home, it may mean purchasing a home that is either smaller, older, or in a less desirable area than you want. The idea is to not get in over your head and purchase a home you can’t afford. You don’t want to be living paycheck to paycheck, struggling to make your mortgage payments. Be sure that your purchase reflects what you can afford.

Is Buying a Home Right for You?

Buying a home can be exciting, and a great investment, and having student loans doesn’t have to mean you can’t be a homeowner. Your student loans may make buying a home a bit more difficult and may limit your affordability options, but they don’t cancel you out of the game.

To know if buying a home is right for you, consider your debt-to-income ratio and whether or not you can afford a mortgage payment. Check your credit score, and talk to a lender about getting pre-approved to see how likely you are to get a home loan and whether or not it is a realistic and affordable investment.

Originally published at www.studentloandiet.com on August 26, 2018.

With over $1.5 trillion of student loan debt, affecting over 40 million Americans, we could all use some help. https://www.gradism.com/